28-year-old pharmacist Ryan Chaw has been investing in real estate for the past 4 years. Inspired by his grandfather who bought properties in the San Francisco Bay Area before the Silicon Valley boom, Ryan dived into real estate early and has now amassed a 6-figure rental portfolio earning almost $11,000 a month. Find out how he did it in today’s episode.
Ryan’s grandfather was able to retire early and paid off part of his and his brother’s college tuition because of real estate. This motivated Ryan to build up a rental portfolio. After graduating in 2015, he worked in both a retail pharmacy and a hospital pharmacy to save up capital.
In 2016, he bought his first property for $262,000. It was a 3 bedroom, 2 bathroom house over 100 years old. Since then, he’s been buying a property every year and has built up a gross passive income of $10,755 a month.
By this August, he plans to close on his 5th rental. With the property expected to rent for $3,200, his rental income should go up to $14,000.
As a newbie, he started buying rental property because he hadn’t heard about house hacking then. So he looked for a real estate agent who invests in rental property himself. His agent found Ryan’s first deal on the MLS.
Unfortunately, Ryan didn’t do any due diligence. He only realized later there was a major plumbing issue causing leaks. So Ryan had to spend $9,000 to have a sanitation crew do clean up, replace the whole sewage line, and pump out the water.
He also had to install a mini-split system HVAC because the current one was subpar. This cost him $15,000. In total, he lost $30,000 because of this.
Since then, he would do a sewage line inspection for every property he purchases. If there are breaks found, then he would negotiate for a lower price.
Ryan chose to rent his properties as student housing. He rents by room with each room renting for $600-700. While average rents for his properties are pegged at $1,500, Ryan is able to rent a 4-bedroom for $2,400-2,500 and a 5-bedroom for $3,100.
Renting by room instead of renting the entire house lets Ryan double his income by the 4th or 5th room. So Ryan looks for properties that he can add extra rooms to.
He leases his rooms via a 1-year contract, but he allows students to sublease in the summer.
His target tenants are post-grad students. Since they are serious about getting their degree, they won’t do wild college parties.
Ryan has a 2-step process for handling conflicts between tenants. First, he’ll get them to sort it out themselves and come up with an actionable plan, or if it doesn’t work, he will talk to the tenants himself.
The second step is for Ryan to talk directly to the parents. Usually, the parent would be able to control their child and prevent the issue from going further.
Ryan came up with his own method for attracting the tenant he wants. He calls it the PRIME method. P stands for placement of the ad. He makes sure that his housing ad is posted where his target tenant hangs out.
R is for review of the prospective tenant’s social media. Ryan checks their social media to see they’re fond of partying, drinking, smoking, or doing drugs. This leads next to I, which is identifying the type of tenant. He wants to know if they get angry quickly, are snarky, or demanding.
M is for measure of responsiveness. The more responsive a prospective tenant is, the more responsible they are. Responsible ones get back to him in a couple of days when he asks for paperwork. They are also polite and respectful when messaging him.
Lastly, E stands for ensuring proof of income. Ryan wants to make sure they have several sources for paying for their rent. He asks for their parent’s bank statement or FICO score, or their student loan or financial aid documents.
His rooms are pretty attractive to students because on-campus housing costs $1,200 and requires the student to stay in a dormitory and bunk with roommates. With his rooms, they pay half the price and get to stay together with their friends.
Generally, with conventional financing, you won’t be able to get a loan anymore after the 4th or 5th property. But Ryan was able to use the equity from his initial property to get a HELOC and pay for his 4th property.
Also, his properties earn double what they’d usually earn on average and lenders consider 75% of the total rental income as true income.
Ryan plans to go into a payoff phase. He will use the cash flow he generates from the rental income and his W2 to pay off his 2nd and 3rd property. He wants to retire when he hits 31 as he estimates being able to pocket $7,000 after expenses and taxes.
Once he’s financially free, he’ll follow other ventures such as teaching others how to use the student housing system themselves.
He has some out-of-state mentees who are already applying his system. Ryan thinks his system might work better outside of California as properties out-of-state have a higher cash flow. But the drawback is that appreciation is lower.
Ryan is waiting for his properties’ value to go up by $250,000. By then, he could leverage the equity to buy 3 or 4 more rental properties.
Watch out for some red flags before buying a property by doing due diligence. Ryan learned from his first property, so he makes sure to look for a property that is first, very close to a college. Preferably he looks for ones that are a 5 minute walking distance or at most a 5 minute driving distance.
Second, he avoids properties that are over 100 years old because a lot of things would be breaking down. Third, he looks for opportunities to add an extra bedroom. You can add a 4th bedroom for a property 1,200 square feet and above. For properties 1,500 square feet and above, you can add up to a 5th bedroom.
Fourth, he looks for parkings and makes sure to have enough room to park 4 or 5 cars. If the property is very close to campus, there might be no need to provide a parking space for each tenant. If the property is a driving distance away, Ryan suggests to make sure there is a driveway or at least, street parking.
Around November-December 2020, Ryan was having trouble getting renters. So he started offering a $100 discount. Most students didn’t want to go home to their parents and still wanted to stay with friends. So with some retargeting including targeting medical professionals, young professionals, and new grads, Ryan’s properties still became 100% occupied.
When it comes to finding deals, get a real estate agent who has an established network in the area.
You don’t have to target students only. You can look at locations near hospitals, big tech, or a government center. People place a lot of value in the short commute or the ability to just walk to work.
And even in a hot market, you can still find a good deal. His latest deal closed at $340,000, and it got appraised for $360,000. That was a deal that Ryan’s agent got from a tip. So finding a deal isn’t impossible.
Whether it’s house hacking or student housing, just take that leap. Real estate is about planting seeds. Even in a hot market, there are still deals to be found.
So go ahead and capture the appreciation and rental increase that’s possible. With inflation, your debt gets cheaper while mortgage payments stay the same.
Ryan plans to hire a VA in the next couple of years. Right now, he does the bookkeeping and has a list of contractors who will take care of any issues. Once there’s a system and protocols to follow, it’ll be easy to find someone to do the job for you.
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